Seminar: Climate Policy and Inequality in Two-Dimensional Political Competition

With Waldemar Marz, Ifo Institute, Munich

Two-dimensional political competition (over the income tax/carbon tax) is combined with a model of economic and distributional effects of climate policy and a key role for income inequality and redistribution in order to investigate the conditions for the formation of climate policy in a national political arena. This approach allows to shed light on the important political, social, and economic preconditions for the realization of environmental policy measures. Voters in the model are heterogeneous in their skill level, which determines income and in their degree of environmentalism and desired degree of redistribution. When political competition is one-dimensional over the carbon tax only and the carbon tax recycling mechanism is progressive (regressive) by assumption, then a higher degree of pre-tax inequality leads to higher (lower) equilibrium carbon tax proposals. When political competition turns two dimensional over the carbon tax and the income tax, then an increase in inequality of pre-tax income is compensated by a higher redistribution via the income tax. But the average carbon tax proposal remains largely unaffected, independently of the progressivity of carbon tax recycling. However, changes in pre-income-tax inequality and in the salience of the political discourse on redistribution affect the polarization of the parties’ carbon tax proposals. The implied change in policy uncertainty can play an important role for investments in green technologies.

Contact person: Peter Kjær Kruse-Andersen